Market Observation from a Technical Perspective

The notable lower house election results favored the ruling party by more than expected, the stock market responded positively, with the Nikkei Stock Average rising 754 to 29,647 and the Topix up 43 to 2,044.

Although a collapse of the Liberal Democratic Party’s majority was feared, the results exceeded expectations, winning 261 seats, securing an absolute majority.

The coalition partner Komeito also increased seats, while the Constitutional Democratic Party unexpectedly lost seats, and Ishin (Japan Innovation Party) expanded nearly fourfold, suggesting they absorbed some of the protest vote.

In light of this election, governance stability provides reassurance to overseas investors, expectations for economic measures rise, and there is growing prospect for the Nikkei to revisit the 30,000 level.

In broad terms, sentiment is bullish, but corporate earnings announcements are intensifying, so stock movements depend on individual companies’ results. The environment remains one where emphasis is on individual issues rather than the whole market, and until earnings are confirmed, earnings risk remains.

Today, driven by futures, the Nikkei rose sharply, breaking through the 29,489 high set on 10/20, and broadly moving toward targeting the 30,000 level.

However, is it going to head straight to 30,000, or move up and down before aiming for it? This depends on overseas trends, so there’s no need to rush into buying.

Until last weekend, many investors stayed on the sidelines awaiting election results; today, after confirming the results, selling traders covered first, followed by chasing buy orders, creating a rally.

In the Japanese market, major companies’ 7–9月 (July-September) quarterly earnings have begun in earnest, with some downgrades due to higher raw materials costs and supply chain issues, while others raised guidance; impacts vary by company.

On the flip side, it’s hard to read through the results, so there is hesitancy to buy until earnings announcements are confirmed.

For already announced earnings, although they’re easier to buy, high expectations pushed up the shares; waiting for a modest pullback before buying is ideal.

For companies that have lowered guidance but where the causes (raw material costs, supply chain issues) are clear, future conditions are expected to improve, so you can buy after a decline, but now is still too early.

Once major earnings reports are completed and outlooks are in place to some extent, movements will become much easier, but it’s better to remain in a stance of waiting for earnings announcements for a while longer.

Political uncertainty from the election has eased, but there remain many uncertainties: global inflation concerns, high raw material costs, supply chain issues, concerns about Chinese real estate company defaults and China’s economic slowdown, and early timing of rate hikes in the U.S. The list of uncertain factors is still long.

Nevertheless, it is also true that many of these concerns are gradually being priced into the stock market.

Today the Nikkei rose significantly, so there is no need to force buying. However, in the appropriate moments of a minor pullback, once earnings announcements have passed and companies with strong earnings outlooks are identified, we should consider buying them gradually.

Don’t rush to buy, but focus on stocks with strong earnings and undervalued themes when prices dip, and maintain that basic stance.

Market Observation from Shibata Kaisen

Last week, the Nikkei moved within a range of 28,500–29,500 yen, with activity around the 29,000 level; it was expected to face resistance above 29,000 until the March 31 House of Representatives election concluded, resulting in large fluctuations within the 28,500–29,500 range.

This week, U.S. stocks hit new highs on all three indices, and once the election is over, ambiguity diminishes, which could support a firmer 28,500–29,500 yen range, with a potential test of the upper 29,500 level.

However, the first week of November has a holiday on the 3rd (Wednesday), giving only four trading days. At the Fed’s FOMC, tapering is considered a certainty to begin within the year; if not implemented this week, it will be next month. If tapering starts this week, U.S. stocks may face profit-taking as the catalyst is exhausted, which would also affect the Nikkei. An alternate view is that if tapering begins at the FOMC on Nov 2–3, markets may already be factoring in the expected rate hikes, and a rally could be sparked by personnel changes at the Federal Reserve (new chair or continuation).

This week, the Nikkei rose on the election result showing the LDP’s single majority, which is supportive for the market; many factors remain favorable. For example, on the 1st, China’s October Caixin Manufacturing PMI, and the U.S. November ISM Manufacturing Index, the 3rd includes the U.S. ADP employment report, and the 5th the October employment data. Considering these, the 28,500–29,500 yen range is likely to persist. Even with relief from the election and tapering, the ceiling of this range remains heavy.

The market itself is tightening, but direction is uncertain; if it breaks upward, the key point is whether it can surpass the 29,489 high from Oct 20; if it breaks down, whether it can fall below the 28,472 low of Oct 25. A breakout above 29,500 would put the market to challenge the September 14 high of 30,795.

Today, the 1st (Mon), the opening was biased toward buying, supported by the LDP securing an absolute majority, and support from the previous week’s record highs in major U.S. stocks, leading to a solid session and a close at +754 to 29,647.

Indicator Analysis

Nikkei Average

Last week’s forecast suggested movement mainly within 28,500–29,500, with upside limited from the 29,000 level, because foreign investors who dislike political changes would not know the extent of LDP seat losses until the election results on the 31st. The market’s real movement would begin in November.

NYSE Dow

Last week, some tech earnings disappointed, but overall earnings remained strong; all three indices showed resistance to upward movement, yet tested new intraday highs.

Currency (Dollar/Yen)

＜Last Week’s Movement… Dollar Strength＞

Last week, stronger-than-expected September new housing starts and October Consumer Confidence surged past expectations, boosting expectations for early rate hikes. The dollar rose to 114.31 yen briefly, but fell back to the 113 yen area after October durable goods orders came in below expectations. It recovered to 114.10 yen, and as expectations for early rate hikes grew, closed near 114.01 yen.

＜This Week’s Outlook… Persistent Expectation for U.S. Rate Hikes＞

This week’s FOMC is expected to lean dovish, which could pressure the dollar as long-term yields pause. The Fed is anticipated to begin tapering in November, with a plan to shrink asset purchases by year-end and complete by mid-2022, already priced in.

This week's forecast